Global Market Quick Take: Europe – April 14, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I) PPI print extends momentum in equities

A negative producer price index m/m kickstarted a rally in equities despite the inflation print did little to move the Fed Funds forward pricing with S&P 500 futures rallying 1.3% to the highest close since early February. Unless macro figures are weakening considerably in the near-term the momentum in equities will likely continue. Today’s big event in US equities is earnings from major US banks such as JPMorgan Chase, Wells Fargo, and Citigroup given the recent banking crisis and indications that lending standards are tightening.

Chinese equities (HK50.I & 02846:xhkg): rallies modestly on lackluster trading

Hang Seng Index and CSI300 Index both opened higher but the rallies lost momentum somewhat in lackluster trading as China internet stocks met selling on upticks. The Hang Seng Index was nearly unchanged and the Hang Seng Tech Index shed 0.5% with Baidu, down around 4%, driving the decline. Semiconductor names, on the other hand, bounced. SMIC (00981:xhkg) gained 4% and Hua Hong Semiconductor added 5%. In A-shares, semiconductor, auto, and gold mining stocks advanced. CSI300 climbed 0.5%.

FX: USD tumbles, AUD and NZD suddenly resurgent

The US tumbled to new lows overnight after weakening sharply in the wake of jobless claims and PPI data yesterday. Initially, the JPY jumped the most across the board on the impact of the weak data on US treasury yields, but as the yield reaction faded, the JPY rolled back over and AUD and NZD led the pack in posting new highs against the US dollar, perhaps on strong credit growth data from China yesterday. AUDUSD rallied more than a figure from its lows, though it has yet to stick above the pivot high from earlier this month just south of 0.6800. EURUSD pulled to its highest level in a year overnight above the pivot highs of 1.1054 from early February.

Crude oil: pared some recent gains on demand concerns

Crude oil traded softer on Thursday despite tailwinds from a weaker dollar after US economic data pointed to a softening economic outlook, and after both Brent and WTI ran into local resistance. Still the market is heading for its fourth weekly gain supported by tightening market conditions following last month surprise OPEC+ production cuts, robust demand from China and the mentioned dollar weakness. Both prompt spreads in WTI and Brent trade in backwardation, thereby supporting the tightening outlook focus. Ahead of today’s monthly oil market report from the IEA, OPEC in its latest monthly report said that “commercial inventories have been building in recent months, and product balances are less tight than seen at the same time a year ago”. Still, the group kept the 2023 world oil demand growth forecast unchanged at 2.3mn barrels/day.

Gold and silver reach fresh cycle highs on broad dollar weakness

Gold prices surged further on Thursday to trade near $2050 with around 1% to go before reaching the March 2022 record high at $2070. Silver meanwhile extended its gain to trade near $26 as the relentless rally that started with the banking crisis last month continues to attract fresh demand. The trigger for the latest move higher was ongoing weakness of the dollar which tumbled to new lows overnight after weakening in the wake of softer jobless claims and PPI reports yesterday. Data that strengthened market expectations for a Fed pause followed by a succession of rate cuts. The dollar weakness helped support strong performances among other metals, platinum's discount to gold narrowed to $985 from above $1000 earlier in the week, while HG Copper’s move above trendline and the recent high at $4.15 may trigger some additional momentum buying amid an outlook pointing towards tighter market conditions amid rising demand for green transformation metals.

Coffee on the move as supply worries resurface

Arabica coffee hit a fresh 6-month high at $2 a pound on Thursday with accelerated buying interest seen after the price broke above its 200-DMA, now support at $1.90. The fundamental driver behind the latest move higher has been the outlook for lower production in Colombia and after shipments from Brazil was reported to have fallen 19% last month. A further extension above $2.04, the 61.8% retracement of the August to January retracement, could see the market target $2.19 next.

US Treasury yields little changed after latest US data (TLT:xnas, IEF:xnas, SHY:xnas)

The market put on a show of bidding up treasuries after a softer than expected US PPI data point yesterday and as weekly jobless claims rolled in again within the recent range, but yields at the front end of the curve quickly reverted back to unchanged and even rose slightly at the longer end of the yield curve after a US 30-year t-bond auction saw few take-aways, alth

What is going on?

US PPI soft, weekly jobless claims higher than expected

The March PPI data came in cooler than expected on the headline M/M and Y/Y, with M/M seeing a 0.5% decline. Core M/M was also cooler than expected, falling 0.1%, vs. expectations of +0.3%. While data suggested disinflation trends maybe more pronounced than what was evident from the CPI report earlier in the week, February prints were revised higher for both the headline and core, suggesting it may be too early to dismiss inflation fears. Meanwhile, the initial jobless claims increased 11k last week to 239k, coming in above expectations and signalling more slack in the labour market. Fed expectations failed to shift meaningfully, although the USD was quite reactive to the data.

Japan’s Fast Retailing opens up  8% on improved outlook

Uniqlo owner Fast Retailing reported H1 (September-February) earnings yesterday, with revenues falling short of estimates but a profit beat and improved outlook helped stock open strongly on Friday. Revenue for the period increased 20% y/y to 1.47trn yen while net income rose 4% to 153 billion yen. The outlook was especially strong as easing of restrictions in Japan and also China’s reopening is likely to underpin. It now expects full-year revenue of 2.68trn yen ($20bn), up 16% from the previous year’s result and compared to 2.65trn yen forecasted in January. Japanese equities are gaining a lot of interest as a diversification opportunity for investors especially after recent interest from Berkshire Hathaway.

Mixed Q1 results from Delta Air Lines but Q2 looks strong

Delta Air Lines shares rose yesterday as the airliners’ Q2 EPS guidance of $2-2.25 beat estimates of $1.61 as demand is looking strong ahead of the crucial summer travel season. Jet fuel costs are coming down and the consumer remains bullish despite inflationary concerns.

Danske Bank lifts its 2023 guidance

Danske Bank is out this morning lifted its net profit outlook for 2023 to DKK 16.5-18.5 vs est. DKK 16.1bn despite loan impairments are expected to rise to DKK 2.5bn. The main driver of the positive outlook is rising interest income.

Novo Nordisk lifts guidance weight loss drug Wegovy

The Danish-based pharmaceutical company raised its FY revenue growth outlook to 24-30% in constant currency and operating income growth in constant currency to 28-34%. Novo Nordisk also says that a second contract manufacturer is now ready to start production increasingly available supply of its new weight loss drug which is the important new growth driver of the company.

ECB hike expectations firm: and huge year-forward contrast with Fed

Three ECB Governing Council speakers yesterday argued in favour of further policy tightening, including Edward Scicluna, Robert Holzmann and Martins Kazaks. Lithuania’s Kazaks clearly favours another 50 basis-point move at the ECB’s May 4 meeting: “I don’t see any reason to slow down any time soon in terms of interest rate increases, because inflation does remain very high”. Austria’s Holzmann said in an interview with CNBC that a 50 basis point hike is “in the ballpark”. It is worth noting that the forward expectations for the Fed prices less than 25 basis points of further hiking, with a policy rate that drops over 85 basis points to 4.14% by the Jan 2024 FOMC meeting, while the ECB is priced to continue hiking into Q4 of this year before possibly in December.

Commodity sector reversing all of March losses

The commodities sector has started April and the second quarter on a much firmer footing than recent months, especially last month when the banking crisis temporarily hurt the growth and demand outlook. The Bloomberg Commodity index which tracks a basket of 23 major commodities trades up 2.3% so far this month with the softer dollar, OPEC+ production cuts and the prospect for falling interest rates in the coming months and not least robust demand from China all adding support. Gains are led by coffee (+15%), sugar (+8%), crude oil (+8%) and silver (+7%) while US natural gas (-12%) and Chicago wheat (-4%) remains the two major laggards.

Sweden CPI comes in this morning softer than expected

Sweden reported March CPI this morning, with the headline coming in at 0.6% M/M and 10.6% Y/Y  vs. 0.9/11.0 expected and “underlying” inflation at +0.4%/8.0% vs. 0.7%/8.3% expected, respectively, and vs. 9.4% in February.

What are we watching next?

France’s Constitutional Court to rule on Macron pension reforms

Macron recently moved to raise the retirement age in France to 64, doing so without a vote from the legislature, a controversial moved that sparked widespread protests. Today, France’s Constitutional Court will rule on the constitutionality of the pension reform, with a variety of potential outcomes, from overturning it entirely to approving it wholesale to criticizing elements of the new rules and even setting in motion a referendum that could take months to play out.

Earnings to watch

The Q1 earnings season kicks into gear today with major US banking earnings. Analysts expect JPMorgan Chase to report Q1 net revenue of $39.7bn up 18% y/y and EPS of $3.39 up 21% y/y, but with the recent banking crisis the outlook is obviously more important and especially JPMorgan’s comments about funding costs and loan growth outlook. Well Fargo is even more interesting because of its large exposure to the US west coast which has been hit the hardest by the slowdown in the technology sector.

This week’s earnings releases:

• Friday: JPMorgan Chase, UnitedHealth, Wells Fargo, BlackRock, Citigroup, Progressive, PNC Financial Services

For an extended overview of all earnings releases check out the earnings calendar in our trading platform.

Economic calendar highlights for today (times GMT)

1230 – Canada Feb. Manufacturing Sales

1230 – US Fed’s Goolsbee (Voter 2023) to speak

1230 – US Mar. Retail Sales

1245 – US Fed’s Waller (Voter) to speak

1315 – US Mar. Industrial Production/Capacity Utilization

1400 – US Apr. Preliminary University of Michigan Sentiment